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The Practice of Central Bank Intervention: Looking Under the Hood.

There has been a long and voluminous literature about official intervention in foreign exchange markets. Official intervention is generally defined as those foreign exchange transactions of monetary authorities that are designed to influence exchange rates, but can more broadly refer to other policies for that purpose. Many papers have explored the determinants and efficacy of intervention (Edison, 1993; Sarno and Taylor, 2000) but very little attention has been paid to the more pedestrian subject of the mechanics of foreign exchange intervention like choice of markets, types of counterparties, timing of intervention during the day, purpose of secrecy, etc. This article focuses on the latter topics by reviewing the motivation for, methods, and mechanics of intervention. Although there apparently has been a decline in the frequency of intervention by the major central banks, reports of a coordinated G-7 intervention to support the euro on September 22, 2000, remind us that intervention remains an active policy instrument in some circumstances.

The second section of the article reviews foreign exchange intervention and describes several methods by which it can be conducted. The third section presents evidence from 22 responses to a survey on intervention practices sent to monetary authorities.

TYPES OF INTERVENTION

Intervention and the Monetary Base

Studies of foreign exchange intervention generally distinguish between intervention that does or does not change the monetary base. The former type is called unsterilized intervention while the latter is referred to as sterilized intervention. When a monetary authority buys (sells) foreign exchange, its own monetary base increases (decreases) by the amount of the purchase (sale). By itself, this type of transaction would influence exchange rates in the same way as domestic open market purchases (sales) of domestic securities; however, many central banks routinely sterilize foreign exchange operations--that is, they reverse the effect of the foreign exchange operation on the domestic monetary base by buying and selling domestic bonds (Edison, 1993). The crucial distinction between sterilized and unsterilized intervention is that the former constitutes a potentially useful independent policy tool while the latter is simply another way of conducting monetary policy.

For example, on June 17, 1998, the Federal Reserve Bank of New York bought $833 million worth of yen (JPY) at the direction of the U.S. Treasury and the Federal Open Market Committee. In the absence of offsetting transactions, this transaction would have increased the U.S. monetary base by $833 million, which would tend to temporarily lower interest rates and ultimately raise U.S. prices, depressing the value of the dollar. [l] As is customary with U.S. intervention, however, the Federal Reserve Bank of New York also sold an appropriate amount of U.S. Treasury securities to absorb the liquidity and maintain desired conditions in the interbank loan market. Similarly, to prevent any change in Japanese money market conditions, the Bank of Japan would also conduct appropriate transactions to offset the rise in demand for Japanese securities caused by the $833 million Federal Reserve purchase. The net effect of these transactions would be to increase the relative supply of U.S. government securities versus Japanese securities held by the public but to leave the U.S. and Japanese money supplies unchanged.

Fully sterilized intervention does not directly affect prices or interest rates and so does not influence the exchange rate through these variables as ordinary monetary policy does. Rather, sterilized intervention might affect the foreign exchange market through two routes: the portfolio balance channel and the signaling channel. The portfolio balance channel theory holds that sterilized purchases of yen raise the dollar price of yen because investors must be compensated with a higher expected return to hold the relatively more numerous U.S. bonds. To produce a higher expected return, the yen price of the U.S. bonds must fall immediately. That is, the dollar price of yen must rise. In contrast, the signaling channel theory assumes that official intervention communicates information about future monetary policy or the long-run equilibrium value of the exchange rate.

Spot and Forward Markets for Intervention

The previous example implicitly assumed that the Federal Reserve Bank of New York conducted its purchase of yen in the spot market--the market for delivery in two days or less. Intervention need not be carried out in the spot market, however; it also may be carried out in the forward market. [2] Forward markets are those in which currencies are sold for delivery in more than two days. Because the forward price is linked to the spot price through covered interest parity, intervention in the forward market can influence the spot exchange rate.

To understand covered interest parity, consider the options open to an American bank that has capital to be invested for one year. The bank could lend that money at the interest rate on U.S. dollar assets, earning the gross return of (1+[[i.sup.USD].sub.t]) on each dollar. Or, it could convert its funds to a foreign currency (e.g., the euro), lend that sum in the overnight euro money market at the euro interest rate, and then convert the proceeds back to dollars at the end of the year. If, at the beginning of the contract, the bank contracts to convert the euro proceeds back to dollars, it will receive 1/[F.sub.t, t+365] dollars for each euro, where [F.sub.t,t+365] is the euros-per-dollar forward exchange rate. The gross return to each dollar through this second strategy is

[S.sub.t]/[F.sub.t,t+365](1 + [[i.sup.euro].sub.t]),

where [S.sub.t] is the euros-per-dollar spot exchange rate on day t. If the return to one strategy is higher than the other, market participants will invest in that strategy, driving its return down and the other return up until the strategies have approximately equal return. Covered interest parity (CIP) is the condition that the strategies have equal return:

(1) (1 + [[i.sup.USD].sub.t]) = [S.sub.t]/[[F.sub.t,t+365] (1 + [[i.sup.euro].sub.t]).

As equation (1) must approximately hold all the time, intervention that changes the forward exchange rate must also change the spot exchange rate. [3] For example, a forward purchase of euros that raises [F.sub.t,t+365] must also raise [S.sub.t].

Forward market interventions--the purchase or sale of foreign exchange for delivery at a future date--have the advantage that they do not require immediate cash outlay. If a central bank expects that the need for intervention will be short-lived and will be reversed, then a forward market intervention may be conducted discreetly, with no effect on foreign exchange reserves data. For example, published reports indicate that the Bank of Thailand used forward market purchases to shore up the baht in the spring of 1997 (Moreno, 1997). [4]

Both the spot and forward markets may be used simultaneously. A transaction in which a currency is bought in the spot market and simultaneously sold in the forward market is known as a currency swap. While a swap itself will have little effect on the exchange rate, it can be used as part of an intervention. The Reserve Bank of Australia (RBA) used the swaps market to sterilize spot interventions. In these transactions, the spot leg of the swap is conducted in the opposite direction to the spot market intervention, leaving the sequence equivalent to a forward market intervention. The RBA uses the spot/swap combination rather than an outright forward transaction because the former permits more flexible implementation of the intervention.

The Options Market and Intervention

The options market has also been used by central banks for intervention. A European-style call (put) option confers the right, but not the obligation, to purchase (sell) a given quantity of the underlying asset on a given date. Usually, the option contract specifies the price for which the asset may be bought or sold, called the strike or exercise price.

Monetary authorities seeking to prevent depreciation or devaluation of their currency may sell put options on the domestic currency or call options on the foreign currency. [5] While the price of options has no direct effect on spot exchange rates, speculators often purchase put options instead of shorting a weak currency. The writers (sellers) of these put options attempt to hedge their position by taking a long position in the weak currency, adding to the downward pressure on its price. By writing put options on the weak currency-adding liquidity to the options market-the central bank provides dealers with a synthetic hedge; dealers need not go into the spot market to take short positions in the weak currency. This arrangement creates the same type of financial risk for the central bank--if the currency is devalued--as would the direct purchase of the weak currency in spot or forward markets. Like forward market intervention, it does not, however, require the monetary authority to immediately expend foreign exchange reserves. In fact, the strategy generates revenues upon the sales of the options. The Bank of Spain reportedly used this strategy of selling put options on the peseta to fight devaluation pressures during 1993 (The Economist, 1993), though the institution denied it emphatically (The Financial Times, 1993).

In another intervention strategy using options, the Banco de Mexico has employed sales of put options on the U.S. dollar to accumulate foreign exchange reserves since August 1, 1996 (Galan Medina, Duclaud Gonzalez de Castillo, Garcia Tames, 1997). The put options give the bearer the right to sell dollars to the Banco de Mexico at a strike price determined by the previous day's exchange rate, called the fix exchange rate. The option may be exercised only if the peso has appreciated over the last month, if the fix peso price of dollars is no higher than a 20-day moving average of previous strike prices. This restriction is designed to prevent the Banco de Mexico from having to buy dollars (sell pesos) during a period of peso depreciation.

The sales of these put options may be considered foreign exchange intervention because they are designed to prevent the necessity of intervention to purchase dollar reserves that might affect the exchange rate in undesirable ways. Because the mechanism is totally passive--the public decides when to exercise the options--the use of these options effectively lessens the signaling impact of Banco de Mexico purchases of foreign exchange reserves.

Indirect Intervention

Recall that although official intervention is generally defined as foreign exchange transactions of monetary authorities that are designed to influence exchange rates, it can also refer to other (indirect) policies for that purpose. In addition to direct transactions in various instruments, Taylor (1982a, b) recounts a number of methods by which countries intervene indirectly in foreign exchange markets. For example, he reports that in the 1970s governments manipulated the currency portfolio of nationalized industries in France, Italy, Spain, and the United Kingdom to influence exchange rates. This practice was allegedly used to "disguise" intervention, as was the French and Italian practice of transacting through undisclosed foreign exchange accounts held at commercial banks.

There are innumerable methods of indirectly influencing the exchange rate that do not fit in the narrow definition of intervention as foreign exchange transactions of monetary authorities designed to influence exchange rates. These methods involve capital controls--taxes or restrictions on international transactions in assets like stocks or bonds--or exchange controls--the restriction of trade in currencies (Dooley, Mathieson, and RojasSuarez, 1993; Neely, 1999), rather than transactions. Sometimes such methods are substituted for more direct foreign exchange intervention, especially by the monetary authorities of countries without a long history of free capital movements. For example, Spain, Ireland, and Portugal introduced capital controls--including mandatory deposits against the holding of foreign currencies--in the exchange rate mechanism (ERM) crises of 1992-93, in response to speculation against their currencies.

SURVEY RESULTS

To investigate the practice of foreign exchange intervention, questionnaires on the topic were sent to the 43 institutions that participated in the Bank for International Settlements (BIS) (1999) survey of foreign exchange practices and the European Central Bank. Of those 44 authorities, 22 responded to some or all of the questions asked. Table 1 lists the surveyed authorities who responded. A cover letter explained that the survey covered practices over 1990-2000, so that authorities that no longer inter vene--or even no longer have independent currencies--could report on past practices. The Reserve Bank of New Zealand was the only authority to re port that it had not intervened in the last 10 years. [6] To respect the confidentiality of the respondents, the responses of specific institutions will not be identified unless the information is clearly in the public domain. Table 2 shows statistics summarizing the distribution of the responses to survey questions on the mechanics of, motivation for, and the efficacy of intervention.

The Mechanics of Intervention

Question 1 inquires about the frequency of intervention. Of the 14 authorities that responded to the question, the percentage of business days on which they report intervening--using either sterilized or unsterilized transactions--ranged from 0.5 percent to 40 percent, with 4.5 percent being the median. While there might be some selection bias because authorities that intervene are more likely to respond to the survey, it does appear that official intervention is reasonably common in foreign exchange markets.

In responding to question 2, 30 percent of authorities report that all their foreign exchange transactions change the monetary base, 30 percent that such dealings sometimes change the base, and 40 percent that they never change the base. For some issues, such as motivation or time horizon of effectiveness, this conflation of responses about sterilized and unsterilized intervention is potentially unfortunate.

When monetary authorities do intervene (question 3), they seem to have some preference for dealing with major domestic banks but will also transact with major foreign banks. This should not come as a complete surprise as banks tend to specialize in trading their own national currencies (Melvin, 1997). Approximately half of authorities will sometimes conduct business with other entities, such as other central banks (23.5 percent) or investment banks (25 percent); 6.3 percent will always transact with investment banks.

Intervention transactions over the last decade have almost always been conducted at least partially in spot markets according to the answers to question 4: 95.2 percent of authorities report that their official intervention activities always include spot market transactions and another 4.8 percent sometimes include spot transactions. A total of 52.9 percent of authorities report sometimes using the forward market, perhaps in conjunction with the spot market to create a swap transaction. No authority reports always using the forward market. Finally, one authority reports having used a futures market to conduct intervention.

There is no clear pattern as to the method of dealing with counterparties (question 5). Direct dealing over the telephone is most popular, being used sometimes or always by 100 percent of authorities. Direct dealing over an electronic network is used by 43.8 percent of authorities sometimes or always. Live foreign exchange brokers are used sometimes or always by 63.2 percent of the respondents. Finally, electronic brokers such as EBS are used by 12.5 percent of the authorities. There was some evidence that responding institutions are moving increasingly toward electronic methods, along with other market participants.

There has been very little research on factors that determine the magnitude of intervention--though reaction function research touches on this issue--but the responses to question 6 indicate that the size of interventions frequently depends on market reaction to initial trades. Ninety-five percent of monetary authorities report that market reaction sometimes or always affects the size of total trades. Because the size of the intervention is endogenous to market reaction, determining the interaction of intervention and exchange rate changes at high frequencies might require careful evaluation. [7]

Most intervention takes place during the business day, but almost half the banks report that they sometimes intervene prior to business hours and more than half intervene after business hours. [8] For example, the Reserve Bank of Australia publicly states that it is willing to intervene outside of normal business hours (Rankin, 1998). Some after-hours intervention might be in support of other authorities. About a quarter of central banks report that they always intervene in the business morning (14.3 percent) or business afternoon (10 percent), however.

In answering question 8, 23.8 percent of authorities report sometimes intervening with indirect methods. The authorities cite changing banking regulations on foreign exchange exposure and moral suasion as methods of indirect intervention. Not surprisingly, indirect methods seem to be used predominantly by central banks without a long history of free capital movements or a convertible currency.

The Motivation for Intervention

The motivation for intervention decisions has been widely researched and often discussed. Research and official pronouncements support the idea that monetary authorities with floating exchange rates most often employ intervention to resist short-run trends in exchange rates, the leaning-against-the-wind hypothesis. [9] Another popular hypothesis is that intervention is used to correct medium-term "misalignments" of exchange rates away from "fundamental values." Question 9 inquires about these possibilities. The responses generally support these hypotheses with 89.5 percent of monetary authorities sometimes or always intervening to resist short-run trends and 66.7 per cent seeking to return exchange rates to "fundamental values." Some countries specified "other" reasons that might be interpreted as variations on the leaning-against-the-wind or misalignment hypotheses. Still other countries note macroeconomic goals such as limiting exchange rate pass through to prices, defense of an exchange rate target, or accumulating reserves as motivating intervention.

One hypothesis that has received some attention in the last few years is that profitability is a consideration in intervention. A series of papers have examined the profitability of intervention (Leahy, 1995; Sweeney, 1997; Saacke, 1999), the relationship between intervention profitability and technical analysis (Neely, 1998, 2000), and whether past profits influence intervention (Kim and Sheen, 1999). While the early evidence (Taylor, 1982b) indicated that central banks were losing money on their intervention, the later papers have been much more supportive of the hypothesis that central banks have at least broken even on floating rate intervention, with some evidence that they have made large profits. [10]

The notion that profitability is a consideration in intervention decisions is uniformly rejected, however, by the survey respondents. Not one respondent to question 9 reports that profitability was ever a motivation for intervention. Despite this, private conversations with individuals involved in intervention decisions suggest that profitability is a useful gauge of their success as careful stewards of public resources. In addition, the Reserve Bank of Australia argues that profitability attests that its intervention has stabilized the exchange rate (Rankin, 1998). This RBA claim relies on Friedman's (1953) claim that stabilizing speculation is equivalent to profitable speculation. If speculators consistently buy (sell) when the asset price is below (above) its equilibrium value, they will both tend to drive the asset price toward its equilibrium value and to profit from these transactions. [11] The link between profitability and stabilizing speculation is tenuous, however. Salant (1974), Mayer and Taguchi (1983), and De Long, Schleifer, Summers, and Waldmann (1990) provide counter examples.

The Role of Secrecy in Intervention

The role of secrecy in intervention is not well understood. Most monetary authorities usually chose to intervene secretly, releasing actual intervention data with a lag, if at all. Some authorities, the Swiss National Bank, for example, always publicize interventions at the time they occur. Does secret intervention maximize or minimize the impact of the transaction? If authorities intervene to convey information to markets, why do they conceal these transactions? Dominguez and Frankel (1993) recount several possibilities: When fundamentals are inconsistent with intervention, monetary authorities would prefer not to draw attention to the intervention. Or, the monetary authority might have poor credibility for sending trustworthy signals. Or, the monetary authority might wish to simply adjust the currency holdings of its portfolio. Bhattacharya and Weller (1997) provide another possible explanation for secrecy. They present a model in which small amounts of intervention reveal the authority's information to private parties, thus influencing exchange rates. This secrecy issue has not been satisfactorily resolved in the literature.

Consistent with the confusion in the academic literature, the answers to question 10 reflect disagreement among the respondents about the purpose of secrecy. More authorities report sometimes or always intervening secretly to maximize market impact (76.5 percent) than report sometimes or always intervening secretly to minimize market impact (57.1 percent): Such disagreement is significant. No central bank cites portfolio adjustment as a reason for secret intervention, contrary to the reasonable conjecture of Dominguez and Frankel (1993). Of course, the central banks might not consider transactions for portfolio adjustment to be intervention.

The Horizon of Intervention Effects

Perhaps the most important question in the literature on central bank intervention is whether central bank intervention is effective in influencing the exchange rate. For many years, the biggest hurdle to answering this question was the paucity of data. More recently, even as more data have become available, it is manifest that two barriers to answering the question remain. First, what would the exchange rate have been in the absence of intervention? Second, over what horizon should we measure the effectiveness of intervention and how large and long-lasting an effect can be considered a success?

The academic literature has been ambivalent about the efficacy of official intervention in the foreign exchange market. The Jurgensen Report (Jurgensen, 1983) was pessimistic about the effects of intervention. Dominguez and Frankel (1993)-- using then-recently released intervention data--argued that intervention can work by changing expectations of future exchange rates. Edison (1993) concluded that, while the evidence might be consistent with some short-run effect, there is no evidence for a lasting effect from intervention. Sarno and Taylor (2000), in contrast, conclude that the recent consensus of the profession is that intervention is effective through both the signal ing and portfolio balance channels.

Despite skepticism on the part of academics, central banks continue to intervene--though per haps less frequently than in the past--implying that policymakers do think that intervention can be an effective tool. Question 11 asks the monetary authorities whether intervention has an effect on exchange rates and, if so, over what horizon one might see the full effect. All of the respondents indicate that they think intervention has some effect on exchange rates. [12] Most of the respondents believe in a relatively rapid response, over a few minutes (38.9 percent) or a few hours (22.2 per cent). Still, a substantial minority think that intervention's full effect is seen over a few days (27.8 percent) or more (11.1 percent). The dispersion in the survey is substantial, indicating almost as much discord among central bankers as among academics.

DISCUSSION AND CONCLUSION

This article has examined the mechanics of intervention--instruments, counterparties, timing, and amounts--as well as related issues like secrecy, motivation, and the perceived efficacy of such transactions. A survey of monetary authorities' intervention practices reveals that a number of monetary authorities do intervene with some frequency in foreign exchange (mostly spot) markets. The desire to check short-run trends or correct longer-term misalignments often motivates intervention, whereas the size of intervention often depends on market reaction to initial trades. Although intervention typically takes place during business hours, most monetary authorities will also intervene outside of these hours, if necessary. And, while there is unanimous agreement that intervention does influence exchange rates, there is much disagreement about the horizon over which the full effect of this influence is felt, with estimates ranging from a few minutes to more than a few days.

The topic of the practice of official intervention is very broad. To simplify this study, issues like coordinated versus unilateral intervention, choice of intervention currency, and distinguishing between intervention in fixed and flexible exchange rate regimes have been left for further study. Other issues that merit further consideration are motivations for secrecy and the metric for judging the success of intervention.

Christopher J. Neely is a senior economist with the Federal Reserve Bank of St. Louis. The author thanks the monetary authorities of Belgium, Brazil, Canada, Chile, the Czech Republic, Denmark, France, Germany, Hong Kong, Indonesia, Ireland, Italy, Japan, Mexico, New Zealand. Poland, South Korea, Spain. Sweden, Switzerland, Taiwan, and the United States for their cooperation with this study. The author thanks Michael Melvin and Paul Weller for discussions about the survey and Hali Edison, Trish Pollard, and Lucio Sarno for helpful comments. Mrinalini Lhila provided research assistance. This article was originally published in Central Banking (November 2000, XI(2), pp. 24-37; [less than]http://www.centralbanking.co.uk[greater than]).

(1.) Empirically, it has been very difficult to establish the reaction of exchange rates to changes in economic fundamentals.

(2.) Exchange rate markets and practices are described in detail in the Bank for International Settlements Central Bank Survey of Foreign Exchange and Derivatives Market Activity (1999).

(3.) Of course, equation (1) could continue to hold with a change in [[i.sup.USD].sub.t] or [[i.sup.euro].sub.t] instead of [F.sub.t,t+365], but the interest rates are held fixed by conditions in the U.S. and euro money markets, respectively

(4.) Not all spot or forward market transactions are interventions, of course. For example, to limit the costs of capital controls that made it hard to hedge foreign exchange exposure, the Reserve Bank of South Africa (RBSA) used to provide forward cover for firms with foreign currency exposure. That is, it would buy dollars forward from foreign firms with dollar accounts receivable and sell dollars to foreign firms with dollar accounts payable in the future. As capital controls have been reduced, the RBSA has reduced its net open position in the forward market.

(5.) Blejer and Schumacher (2000) discuss the implications of the use of derivatives for central bank's balance sheets.

(6.) The Reserve Bank of New Zealand's response on this point is a matter of public record. See Deputy Governor Sherwin's May 9. 2000, speech to the World Bank Treasury at [less than]http://www.rbnz.govt.nz/speeches/0092115.html[greater than]. This link was current as of April 20, 2001. The Appendix to this article provides links to descriptions of foreign exchange markets and/or intervention policies in the Web pages of a number of monetary authorities.

(7.) The author thanks Lucio Sarno for pointing this out.

(8.) Fischer and Zurlinden (1999) examine the affect of intervention using high frequency data and the time of data.

(9.) Indeed, the published statements of several central banks specifically cite the desire to counter trends in exchange rates as motivating intervention. See Board of Governors (1994, p. 64) or Rankin (1998).

(10.) Sweeney (1997, 2000) argues that risk adjustment is crucial in assessing profits or losses from official intervention.

(11.) Friedman (1953) was referring more generally to speculation in foreign exchange and discussed government speculation (intervention) as a special case.

(12.) Of course, having an effect on exchange rates at some horizon might not imply that intervention is successful.

REFERENCES

Bank for International Settlements. "Central Bank Survey of Foreign Exchange and Derivatives Market Activity." May 1999.

Bhattacharya, Utpal and Weller, Paul A. "The Advantage to Hiding One's Hand: Speculation and Central Bank Intervention in the Foreign Exchange Market." Journal of Monetary Economics, July 1997, 39(2), pp. 257-77.

Blejer, Mario I. and Schumacher, Liliana. "Central Banks Use of Derivatives and Other Contingent Liabilities: Analytical Issues and Policy Implications." Working Paper No. 00-66, International Monetary Fund (Washington, DC), March 2000.

Board of Governors of the Federal Reserve System. The Federal Reserve System: Purposes and Functions.

Washington, DC, 1994.

De Long, J. Bradford; Shleifer, Andrei; Summers, Laurence H. and Waldmann, Robert J. "Noise Trader Risk in Financial Markets." Journal of Political Economy, August 1990, pp. 703-38.

Dominguez, Kathryn and Frankel, Jeffery. "Does Foreign Exchange Intervention Work?" Washington, DC: Institute for International Economics, 1993.

Dooley, Michael P.; Mathieson, Donald J. and Rojas-Suarez, Liliana. "Capital Mobility and Exchange Market Intervention in Developing Countries." Working Paper No. 6247, National Bureau of Economic Research (Cambridge, MA), October 1997.

Economist. "Spanish Peseta; Adios." 1 May 1993, pp. 84.

Edison, Hali J. "The Effectiveness of Central-Bank Intervention: A Survey of the Literature After 1982." Special Papers in International Economics No. 18, Department of Economics, Princeton University. 1993.

Financial Times. "Peseta Devalued by 8% in ERM: Lisbon Realigns Escudo as Madrid Plans 1 1/2 Point Rate Cut." 14 May 1993, pp. 1.

Fischer, Andreas M., and Zurlinden, Mathias. "Exchange Rate Effects of Central Bank Interventions: An Analysis of Transaction Prices." Economic Journal, October 1999, 109(458), pp. 662-76.

Friedman, Milton. Essays in Positive Economics. Chicago: University of Chicago Press, 1953, pp. 157-203.

Galan Medina, Manuel; Duclaud Gonzalez de Castilla, Javier and Garcia Tames, Alonso. "A Strategy for Accumulating Reserves Through Options to Sell Dollars." Unpublished manuscript, Banco de Mexico, 1997. [less than]http://www.banxico.org.mx/siteBanxicoINGLES/bPoliticaMonetari a/FSpoliticaMonetaria.html[greater than].

Jurgensen, Philippe. "Report of the Working Group on Exchange Market Intervention." Washington, DC: U.S. Department of the Treasury, March 1983.

Kim, Suk-Joong and Sheen, Jeffery. "The Determinants of Foreign Exchange Intervention by Central Banks: Evidence from Australia." Unpublished manuscript, The University of New South Wales, December 1999.

Leahy, Michael P. "The Profitability of US Intervention in the Foreign Exchange Markets." Journal of International Money and Finance, December 1995, 14(6), pp. 823-44.

Mayer, Helmut and Taguchi, Hiroo. "Official Intervention in the Exchange Markets: Stabilising or Destabilising?" Bank for International Settlements Economic Paper 6, March 1983.

Melvin, Michael T. International Money and Finance. 5th Ed. Reading, MA: Addison Wesley, 1997.

Moreno, Ramon. "Lessons from Thailand." Federal Reserve Bank of San Francisco Economic Letter No. 97-33, 7 November 1997.

Neely, Christopher J. "Technical Analysis and the Profitability of U.S. Foreign Exchange Intervention." Federal Reserve Bank of St. Louis Review, July/August 1998, 80(4), pp. 3-17.

_____. "An Introduction to Capital Controls." Federal Reserve Bank of St. Louis Review, November/December 1999, 81(6), pp. 13-30.

_____. "The Temporal Pattern of Trading Rule Returns and Central Bank Intervention: Intervention Does Not Generate Trading Rule Profits." Working Paper 2000-18B, Federal Reserve Bank of St. Louis, August 2000.

Rankin, Bob. "The Exchange Rate and the Reserve Bank's Role in the Foreign Exchange Market." Reserve Bank of Australia, 1998. [less than]http://www.rba.gov.au/publ/pu_teach_98_2.html[greater than].

Saacke, Peter. "Technical Analysis and the Effectiveness of Central Bank Intervention." Unpublished manuscript, University of Hamburg, 1999.

Salant, Stephen W. "Profitable Speculation, Price Stability, and Welfare." International Finance Discussion Paper 54, Board of Governors of the Federal Reserve System, November 1974.

Sarno, Lucio and Taylor, Mark P. "Official Intervention in the Foreign Exchange Market." Unpublished manuscript. University College, Oxford, 2000.

Sweeney, Richard J. "Do Central Banks Lose on Foreign Exchange Intervention? A Review Article. "Journal of Banking and Finance, December 1997, 21(11 - 12), pp. 1667-84.

_____. "Does the Fed Beat the Foreign Exchange Market?" Journal of Banking and Finance, May 2000, 24(5), pp. 665-94.

Taylor, Dean. "The Mismanaged Float: Official Intervention by the Industrialized Countries," in Michael B. Connolly, ed., The International Monetary System: Choices for the Future. Westport, CT: Praeger Publishers, 1982a, pp. 4984.

_____. "Official Intervention in the Foreign Exchange Market, or, Bet Against the Central Bank." Journal of Political Economy, April 1982b, 90(2), pp. 356-68.

Responding Monetary Authorities

Country/authority

Belgium

Brazil

Canada

Chile

Czech Republic

Denmark

France

Germany

Hong Kong

Indonesia

Ireland

Italy

Japan

Mexico

New Zealand

Poland

South Korea

Spain

Sweden

Switzerland

Taiwan

United States

NOTE: The table identifies the 22 monetary authorities that responded to the survey.
Summary of Intervention Survey
Responses
 No. of
 responses Minimum Median
1. In the last decade, on approximately 14 0.5 4.5
 what percentage of business days has
 your monetary authority conducted
 intervention?
 No. of
 responses Never Sometimes
2. Foreign exchange intervention 20 40.0 30.0
 changes the domestic monetary
 base.
3. Intervention transactions are
 conducted with the following
 counterparties:
 Major domestic banks 21 0.0 28.6
 Major foreign banks 18 16.7 72.2
 Other central banks 17 76.5 23.5
 Investment banks 16 68.8 25.0
4. Intervention transactions are
 conducted in the following
 markets:
 Spot 21 0.0 4.8
 Forward 17 47.1 52.9
 Future 16 93.8 6.3
 Other (please specify in margin) 15 93.3 6.7
5. Intervention transactions are
 conducted by:
 Direct dealing with counter- 20 0.0 30.0
 parties via telephone
 Direct dealing with counterparties 16 56.3 31.3
 via electronic communication
 Live FX brokers 19 36.8 52.6
 Electronic brokers (e.g., EBS, 16 87.5 0.0
 Reuters 2002)
6. The following strategies determine
 the amount of intervention:
 A prespecified amount is traded 17 17.6 70.6
 Intervention size depends on market 20 5.0 55.0
 reaction to initial trades
7. Intervention is conducted at the
 following times of day:
 Prior to normal business hours 16 56.3 43.8
 Morning of the business day 21 0.0 85.7
 Afternoon of the business day 20 0.0 90.0
 After normal business hours 17 35.3 64.7
8. Is intervention sometimes conducted 21 76.2 23.8
 through indirect methods, such as
 chan in the regulations regarding
 foreign exchange exposure of banks?
9. The following are factors in
 intervention decisions:
 To resist short-term trends in 19 10.5 42.1
 exchange rates
 To correct long-run misalignments 18 33.3 44.4
 of exchange rates from
 fundamental values
 To profit from speculative trades 17 100.0 0.0
 Other 16 62.5 25.0
10. Intervention transactions are
 conducted secretly for the
 following reasons:
 To maximize market impact 17 23.5 35.3
 To minimize market impact 14 42.9 57.1
 For portfolio adjustment 11 100.0 0.0
 Other 12 75.0 16.7
11. In your opinion, how long does 75.0 16.7 8.3
 it take ot observe the full
 effect of intervention on
 exchange rates?
 A few minutes 18 38.9
 A few hours 18 22.2
 One day 18 0.0
 A few days 18 27.8
 More than a few days 18 11.1
 Intervention has no effect on 18 0.0
 exchange rates
 Maximum
1. In the last decade, on approximately 4.0
 what percentage of business days has
 your monetary authority conducted
 intervention?
 Always
2. Foreign exchange intervention 30.0
 changes the domestic monetary
 base.
3. Intervention transactions are
 conducted with the following
 counterparties:
 Major domestic banks 71.4
 Major foreign banks 11.1
 Other central banks 0.0
 Investment banks 6.3
4. Intervention transactions are
 conducted in the following
 markets:
 Spot 95.2
 Forward 0.0
 Future 0.0
 Other (please specify in margin) 0.0
5. Intervention transactions are
 conducted by:
 Direct dealing with counter- 70.0
 parties via telephone
 Direct dealing with counterparties 12.5
 via electronic communication
 Live FX brokers 10.5
 Electronic brokers (e.g., EBS, 12.5
 Reuters 2002)
6. The following strategies determine
 the amount of intervention:
 A prespecified amount is traded 11.8
 Intervention size depends on market 40.0
 reaction to initial trades
7. Intervention is conducted at the
 following times of day:
 Prior to normal business hours 0.0
 Morning of the business day 14.3
 Afternoon of the business day 10.0
 After normal business hours 0.0
8. Is intervention sometimes conducted 0.0
 through indirect methods, such as
 chan in the regulations regarding
 foreign exchange exposure of banks?
9. The following are factors in
 intervention decisions:
 To resist short-term trends in 47.4
 exchange rates
 To correct long-run misalignments 22.2
 of exchange rates from
 fundamental values
 To profit from speculative trades 0.0
 Other 12.5
10. Intervention transactions are
 conducted secretly for the
 following reasons:
 To maximize market impact 41.2
 To minimize market impact 0.0
 For portfolio adjustment 0.0
 Other 8.3
11. In your opinion, how long does
 it take ot observe the full
 effect of intervention on
 exchange rates?
 A few minutes
 A few hours
 One day
 A few days
 More than a few days
 Intervention has no effect on
 exchange rates


NOTE: Question 1 shows the minimum, median, and maximum responses (from 0 to 100) on the percentage of days intervention was conducted in the last decade. Questions 2 through 10 show the percentage of responses of "Never," "Sometimes," and "Always" to those questions. Question 11 shows the percentage of responses indicating that the full effects of intervention were felt at each horizon.
Appendix
Monetary Authority Web Pages Describing
Intervention or Foreign Exchange markets
 Uniform Resource Locator on
Monetary authority intervention or foreign exchange
Reserve Bank of http://www.rba.gov.au/publ/
Australia pu_teach_98_2.html
Central Bank of Brazil http://www.bcb.gov.br/ingles/
 himfl900.shtm#destino6
Bank of Canada http://www.bankofcanada.
 ca/en/backgrounders/bg-
 e2.htm
Bank of England http://www.bankofengland.
 co.uk/factfxmkt.pdf
European Central Bank http://www.ecb.int
German Bundesbank http://www.bundesbank.de/en/presse/
 pressenotizen/pdf/mp100197.pdf
Hong Kong http://www.info.gov.hk/hkma
Monetary Authority /eng/speeches/speechs/
 joseph/speech_O3O398b.htm
Bank of Japan http://www.boj.or.jp/en/faq/faqkainy.htm
Banco de Mexico http://www.banxico.org.mx/
 siteBanxicolNGLES/
 bPolitica Monetaria/
 FSpoliticaMonetaria.html
National Bank of Poland htp://www.nbp.pl/en
 /publikacje/index.html
Monetary Authority http:flwww.mas.gov.sg/
of Singapore resource/index.html
Reserve Bank of http://www.resbank.co.
South Africa zalibd/fwdcover.html
Swiss National Bank http://www.snb.ch/e/
 publikationen/publi.html
Bank of Thailand http://www.bot.or.th/
 BOTHomepage/BankAtWork/
 Monetary&FXPolicies/EXPolicy
 /8-23-2000-Eng-i/exchange_g.htm
Federal Reserve of the http://www.federalreserve.
United States gov/pf/pdf/frspurp.pdf
Monetary authority Notes on the pages
Reserve Bank of Exceiient descriptive page
Australia on markets and intervention.
Central Bank of Brazil Foreign exchange policy.
Bank of Canada Concise description of
 intervention policy.
Bank of England Description of foreign exchange
 markets.
European Central Bank No work directly describing inter-
 vention policy but speeches and
 working papers may relate.
German Bundesbank 1997 description of the ECB's
 responsibility in foreign
 exchange intervention.
Hong Kong Speech by the CEO describing
Monetary Authority exchange rate policy.
Bank of Japan Outline of the Bank of Japan's
 foreign exchange intervention
 operations.
Banco de Mexico Description of monetary and
 exchange rate policies.
National Bank of Poland Some descriptions of
 intervention in annual reports.
Monetary Authority See the pamphlet, Economics
of Singapore Explorer #1.
Reserve Bank of Describes South Africa's use
South Africa of forward cover in somewhat
 technical terms.
Swiss National Bank Some intervention descriptions
 in annual reports.
Bank of Thailand Very brief description of current
 exchange rate policy
Federal Reserve of the See page 64 for a very brief
United States description of intervention policy.
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Author:Neely, Christopher J.
Publication:Federal Reserve Bank of St. Louis Review
Article Type:Statistical Data Included
Geographic Code:00WOR
Date:May 1, 2001
Words:6480
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